Too much or not enough of Ricardo?

Review of “Ricardo’s Dream” by Nat Dyer

This is an extraordinary difficult book to review. Not because the main thesis is unclear or because it is written in a too complex way but because it combines, in my opinion, a very sensible critique of neoclassical economics with absolutely untenable or misguided propositions, and displays blindness to reality similar to that it finds objectionable in others.

Nat Dyer’s thesis is ultra simple. The “original sin” of economics lies in the unquestionable acceptance of David Ricardo’s abstract model of analysis underpinned by the assumption of rational (Dyer prefers “calculating”) self-interested individual. Ricardo’s method, most famously reflected in his theory of comparative advantage, has been criticized from the very year when The Principles of Political Economy was published in 1817 (and even before, when Ricardo was writing it). It has nevertheless survived under the high-priesthoods of John Stuart Mill and Alfred Marshall that somewhat self-servingly (especially the latter) accepted it and applied it. Dyer then jumps one century ahead and moves to the United States where Milton Friedman and the second Chicago school plus Paul Samuelson equally believed in it and promoted it, and where economists’ love for abstraction and neat clear-cut simple truths led to the disregard of societal constraints and to a blind belief in a calculating homo economicus. This produced the financialization of the US economy, globalization that harmed American middle class, the financial crisis of 2007-08, destruction of the environment, rise of populism, and, it is tacitly implied, almost the end of Western civilization.

The story is told reasonably well by Dyer. There are chapters worth reading: especially in the first part of the book that deals with Ricardo’s life and shows in interesting detail how the English-Portuguese trade that was given by Ricardo as an example in his formulation of the theory of comparative advantage was itself a part of a much larger canvass of political alliances, wars, colonialism and slavery. That chapter is worth reading not because, as Dyer seems to believe, it disproves Ricardo’s theory (for, in fact, Ricardo’s example would hold equally well with countries A and B, and goods X and Y), but for its economic history angle, and for the background to the Anglo-Portuguese Methuen treaty, including slavery and pillage of Brazilian gold. These aspects, I believe, are not well known and are indeed very entreatingly, and at times even powerfully, described by Dyer.

My review will be more critical than the book itself deserves because I take Dyer’s book as emblematic of the way Western liberals and even leftist thinkers look at history and at today’s globalization. There are two major disagreements that I have.

The first relates to the “accusation” of Ricardo that provides the red thread of the book. As mentioned, the accusation of abstractness is far from new and is even grosso modo deserved. Dyer, however, in full agreement (of which he may not be even aware) with neoclassicists forgets that Ricardo’s abstract method of analysis was also reflected in his introduction of the class conflict as the crucial part of economics under capitalism. It is thus not surprising that Ricardo was followed by socialist Ricardians, Marx (for whom Ricardo, as Schumpeter writes, was the only “teacher”), neo-Marxists and neo-Ricardians. All of them strongly dissented from neoclassical economics, and did so basing themselves precisely on Ricardo’s method and his class analysis. The latter was entirely excised from neoclassical economics, mostly for political reasons, and that made neoclassical economics disconnected from reality (as I argue in Visions of Inequality, Chapter 7).

Thus Dyer unfortunately misses the crucial point: Ricardo might have been guilty of exaggerated use of abstract thinking, but it is this very abstract thinking that made a much more realistic approach to political economy—namely one where classes fight for the distribution of national income, where power and agency play a role—possible. To put it simply: without Ricardo (and indeed Adam Smith) and class analysis, there is no realistic depiction of any capitalist economy. Dyer, like most of today’s liberal critics, is so deeply steeped in neoclassical economics (of which he criticizes solely the assumption of “homo economicus”) that he never mentions the greatest weakness of the neoclassical approach: disregard of the class structure of capitalist societies. So, if one may rightly see some connection between Ricardo’s method and (say) Robert Lucas, Ricardo cannot be held responsible for neoclassics pushing this method way above any reasonable limits, nor can Ricardo’s role in displaying the centrality of class in capitalist economy be so easily dismissed (or rather be ignored, as is the case in Dyer’s book). The problem is not the assumption of the rational individual which especially in today’s highly commodified societies populated by numerically-savvy individuals is quite realistic, but in rejection of social class as a meaningful unit of analysis. So it is not that we have too much of Ricardo. We have too little of him.

The second liberal/left “emblematic” feature of the book with which I disagree is the discussion of current globalization (in the last part of the book) entirely from a Western point of view. The chapter on how globalization has led to the deterioration in the position of Western middle classes (which is true) is told without a single mention of what globalization has allowed the poor people in the world, and most notably in Asia, to accomplish. The problems of the Western middle class, viz., of people around the 80^th or even 90^th global income percentile, and representing some 3 to 4 percent of the world population, are presented as if they applied to the entire universe. The story is told as if almost one billion people have not been brought out of abject poverty thanks to economic growth and globalization.

In that part of the book, not only is the story told entirely from an Anglo-American point of view but the text acquires disturbing nationalistic tones as when the only mention of China and globalization is given in the context of “the challenge of….resurgent China” (p. 206). Suddenly, the only thing that matters is geopolitics. These national-socialistic hues are all the more interesting, but not uncommon among the liberal left, because they are associated with the entire gallery of political correctness where every quote from Smith or Ricardo is repeatedly criticized for not being gender-neutral, and the “thought police” is applied to the writings two hundred years old.

Dyer presents a very common current view of Anglo-American liberal intelligentsia where harsh critiques of British imperialism are presented simultaneously with total unawareness of economic works done by non-Anglophone economists and, more importantly, by works of Western and non-Western economists working in other than the neoclassical tradition. On top of that, the current convergence of world incomes is presented solely as an evil that has destroyed the Western middle class. It would seem that a harsh critique of colonialism is sufficient to make one be absolved from all possible Western-centrism at the present. Critique of colonialism thus becomes a ritualistic act telling the readers that one can be, in good conscience, an economic nationalist today.

To be clear, I do not think that this particular perspective is wrong when adopted by politicians or economists who write on the issues of domestic economic policy, and who are legitimately concerned with the welfare of their own co-citizens first, and possibly only with that. But that perspective is unacceptable when adopted by economists as such whose interest, as indeed Smith, Ricardo and Marx have shown, must encompass the entire world, and give to every individual, wherever he or she lives, implicitly an equal weight when deciding what policies are good or bad.